A blending of screens

A budget of about $25 million may not be much for director Michael Bay, maker of such mega-budget movies as "Armageddon" and "Pearl Harbor."

But it's enough to get him launched on a new passion: creating a video game that matches the quality of a feature film.

Bay's first-person shooter game is part of a larger strategy to transform Digital Domain Inc., where he is now co-chairman, from one of Hollywood's elite special-effects houses into a full-blown production studio, capitalizing on the convergence between games and feature films.

That was a key inducement for Bay in leading a Florida-based investment group, Wyndcrest Holdings, last May in its $35-million purchase of the Venice company.

"I make world-class images," Bay said. "Why not put those images into a game?"

Over 13 years, Digital Domain made its name with computer wizardry that created memorable scenes for "Titanic," "The Day After Tomorrow" and "Flags of Our Fathers."

But differences among the former owners, and a lack of investment capital, hampered the company in recent years. That allowed rivals such as Sony Pictures ImageWorks, Rhythm & Hues and Peter Jackson's Weta to cut into Digital Domain's core effects business.

Compounding matters, Digital Domain and other U.S. visual-effects houses have been squeezed by rising labor costs and competition from rivals in Europe and Asia that are able to produce effects at a fraction of the cost.

Beyond fixing leaky roofs and buying ergonomic chairs for the company's 500 workers, the new owners bought a new computer network. They've also worked to improve Digital's relations with major studios, building up feature effects work that helped return the company to the black last year after a loss in 2005.

Company executives won't disclose finances but say Digital Domain will post a double-digit increase in revenue this year, helped by a thriving business working on commercials. Profit, however, will be flat as Wyndcrest pumps up to $100 million over the next three years into equipment purchases, acquisitions and about 100 hires, many of them video-game programmers, Stork said.

Digital Domain plans to develop four or five games over the next two years, tapping into a lucrative industry whose sales in the U.S. climbed 19% to a record $12.5 billion last year, according to research firm NPD Group. As video entertainment becomes more sophisticated, the line between video games and movies is blurring.

Mindful of that trend, Digital Domain is building its own games unit and plans to acquire one or more game firms this year. The games would mostly be tied to Digital Domain's visual-effects projects, appealing to a range of styles and genres.

"We're not just talking about the convergence of film and video games," said Ed Ulbrich, president of Digital Domain's commercial division. "It's no longer a theory."

The video game industry, however, is fiercely competitive, dominated by such established players as Activision, Electronic Arts and THQ Inc.

"It's going to be very difficult" for Digital Domain, said Michael Pachter, an analyst with Wedbush Morgan Securities. "The skill set of a game maker is very different from the skill set of a graphic artist."

Nonetheless, company executives say they have a competitive advantage: a network of A-list directors that includes David Fincher ("Fight Club"), Rob Cohen ("The Fast and the Furious") and, of course, Bay, whose latest movie, "Transformers," is one of the summer's most anticipated releases.

Most film-based games are developed through third parties, and filmmakers often have little or no creative control. By contrast, Digital would let filmmakers direct their own games.

Beyond video games, Digital Domain also wants to make computer-animated feature films, following a path of other effects houses such as rivals Rhythm & Hues of Los Angeles and Sony ImageWorks. ImageWorks helped spawn a new animation division last year at Sony Pictures, which releases "Surf's Up" next month.

Unlike Sony, however, Digital Domain won't compete in the crowded family market but will make animated films targeted to teenagers and young adults that cost $30 million to $50 million.

To keep costs down, the animation will be created using video game software in real time, rather than the slower frame-by-frame technique. Creating digital characters used in both a movie and a video game also would reduce costs.

A recent TV ad that Digital Domain made for "Gears of War," the popular Microsoft science-fiction game for Xbox 360, showed off the new direction.

Instead of relying on conventional software, Digital Domain's visual-effects artists created the 60-second spot using the same software that the game runs on. The commercial featured realistic effects and took only five weeks to make, about half the regular time, said Jay Wilbur, vice president of business development at Epic Games Inc., developer of "Gears of War."